This article continues Insider Monkey’s analysis of how well recent stock recommendations from leading investment banks and advisory firms have performed. Last week we covered Goldman Sachs’ best stock picks for 2018. Next in line is Morgan Stanley (NYSE:MS) and its Fresh Money Buy List. The list was first introduced by the famous investment strategist Byron Wien and is “a compilation of some of our best near term risk-reward stock ideas that stand on their own merit.” Morgan Stanley analysts employ a bottom-up approach and search for “specific catalysts such as a change in industry fundamentals, a positive EPS surprise, or new product introduction” to select the 10 stocks in the list. The Fresh Money Buy List was reintroduced by Morgan Stanley’s current chief U.S. equity strategist Michael Wilson and included short-term stock picks expected to “work over 3-6 months.”
It has been approximately 6 weeks since Morgan Stanley’s Michael Wilson made its Fresh Money Buy List public in an interview with CNBC and the 10 stock picks that were on that list have delivered an average return of 2.33%, while the S&P 500 Index is up by 3.09%. By comparison, Insider Monkey’s flagship best performing hedge fund strategy’s stock picks returned 7.4% since March 23, outperforming both Morgan Stanley’s picks as well as the broader market. Both Morgan Stanley’s and our stock picks are short-term in nature and have a shelf life of about 3 months. The main difference is that our flagship strategy’s picks managed to outperform the S&P 500 ETF (SPY) by more than 30 percentage points (81.8% vs. 51.3%) since its inception 4 years ago. You can download the latest issue of our quarterly newsletter free of charge here.
In its note to investors, Morgan Stanley said its analysts were very optimistic about Knight-Swift Transportation Holdings Inc (NYSE:KNX) and placed a price target of $60 per share, which implied an upside of approximately 21%. The main reasons behind the analysts’ bullishness were favorable cyclical trends in the trucking industry and their belief that the company’s management had been “deeply conservative” with regard to the synergy potential following last year’s merger of Knight Transportation and Swift Transportation.
So far, this recommendation from Morgan Stanley analysts has gone horribly wrong. Shortly after making the Fresh Money Buy List, Knight-Swift Transportation Holdings Inc (NYSE:KNX) entered a downtrend and has fallen more than 20% through Friday’s closing price of $38.96 per share. Although Knight-Swift Transportation reported adjusted earnings of $0.44 per share for the first quarter and topped analysts’ expectations, the $1.27 billion in revenue was below consensus and the stock has continued its decline.
Morgan Stanley was also very bullish on T-Mobile Us Inc (NASDAQ:TMUS) because the company had registered a significant increase in market share since 2013, which came as the company “reshaped itself as the Un-carrier, determined to solve the industry’s pain points (overage charges, international roaming, inflexible device upgrades, etc.).” Furthermore, analysts expected T-Mobile “to generate significant free cash flow (FCF) over the next several years” and to “significantly expand margins given a high degree of operating leverage.” This, in turn, would lead to investors being repaid through share buybacks. Morgan Stanley analysts set a price target of $74, which, at that time, implied an upside potential of 14%.
For the past nine months, T-Mobile Us Inc (NASDAQ:TMUS) stock has been trading in a range, oscillating around the $60 level. As Morgan Stanley made public its Fresh Money Buy List on CNBC, T-Mobile stock started downhill and is currently 4.2% in the red. The stock fell off a cliff after T-Mobile Us Inc (NASDAQ:TMUS) announced on April 29 that it had resumed merger talks with Sprint Corp (NYSE:S) and had hammered out a deal. Investors were quick to put pressure on both stocks, skeptical that the deal would get a green light from the regulators. Four years ago another merger between T-Mobile and Sprint was blocked by regulators.
From the healthcare sector, Morgan Stanley analysts chose Iqvia Holdings Inc (NYSE:IQV), mainly due to the company’s therapeutics expertise and scale, with Iqvia Holdings having a large number of top biotech and pharmaceutical companies among its clients.
So far, Iqvia Holdings Inc (NYSE:IQV) has failed to live up to Morgan Stanley’s expectations. The stock has ended Friday’s session at $99.02 per share, down 0.7% since March 23, when Michael Wilson appeared on CNBC. Iqvia Holdings Inc (NYSE:IQV) has recently published its first quarter results, topping Wall Street’s estimates. Revenues came in at $2.56 billion, above the analysts’ consensus of $2.44 billion, while earnings per share rose 20% year-over-year to $1.34, also surpassing analysts’ projections. Having had a solid first quarter, the company’s management decided to adjust its full-year guidance and raised revenue estimates by $50 million. However, the management said it does not expect higher revenue to translate into higher profits, which put investors off.
Chemical giant LyondellBasell Industries NV (NYSE:LYB) was also picked by Morgan Stanley analysts as a potential winner. They concluded that the stock was very attractive at a forward Price to Earnings (P/E) ratio of 10 and believed that Wall Street’s EPS estimates of $2 to $3 for 2018 were to bearish. Morgan Stanley was eyeing a 21% upside, having set a price target of $130 per share. Long term, LyondellBasell Industries NV (NYSE:LYB) shares could reach $180, driven by investors’ recognition of the company’s financial strength and low leverage.
Ever since the broader market selloff in February, LyondellBasell Industries NV (NYSE:LYB) stock has been declining slowly but steadily. At Friday’s market close, LyondellBasell shares were trading at $104.79 apiece, up 0.23% since March 23. Even its stellar first quarter earnings report failed to prop up the stock. LyondellBasell posted $3.11 in earnings per share and $9.77 billion in revenue, well above analysts’ consensus of $9.39 billion in revenue and earnings of $2.80 per share.
The iconic Walt Disney Co (NYSE:DIS) was also on Morgan Stanley’s list of bullish recommendations. Analysts concluded that the company was well positioned to profit from the consumer transition to streaming services and internet-based video consumption, a trend that is on the rise globally. They were also expecting the company to grow its revenue from its TV networks, parks and films, and set a price target of $130 per share, for a 26% gain.
When news of Morgan Stanley’s Fresh Money Buy List emerged, Walt Disney Co (NYSE:DIS) stock was already in a downtrend and has continued to inch lower. It found support at the $100 level and has been oscillating around this level for the past month. Having ended the Friday’s session at $101.15, Disney share are up by 2.7% since Michael Wilson’s appearance on CNBC. Investors are waiting for Walt Disney Co (NYSE:DIS) earnings report, which is due on May 8, after market close. Analysts have projected $1.69 in earnings per share and $14.08 billion in revenue.
Although Morgan Stanley analysts only set a 4% upside potential for NextEra Energy Inc (NYSE:NEE), they heaped plenty of praise on the utility giant. According to their note to investors, NextEra Energy was “Best-in-class utility coupled with a premier renewable energy business.” Morgan Stanley estimated 6% to 8% earnings growth through 2021, compared to 4% to 6% earnings growth for its peers. NextEra’s dividends were also expected to grow at 12% to 14% through at 2020.
NextEra Energy Inc (NYSE:NEE) is one of the stocks on Morgan Stanley’s list that is close to reaching its target price. The stock inched higher throughout March but settled in a tight range in April, bouncing between the $160 and $165 levels, with Morgan Stanley’s target price of $168 in sight. NextEra Energy Inc (NYSE:NEE) reported mixed results in its latest earnings report. The company registered $3.86 billion in revenue, below estimates, and adjusted earnings of $1.94 per share, well above the analysts’ consensus of $1.78 per share. The stock barely budged in reaction to the report.
Morgan Stanley saw Cisco Systems, Inc. (NASDAQ:CSCO) the “best positioned to provide software/security defined networking (SDN2) solutions to reduce the cost of security breaches.” This warranted the addition of Cisco to the firm’s Fresh Money Buy List with a price target of $50, approximately 10% above the March 14 closing price.
In the second half of March, Cisco Systems, Inc. (NASDAQ:CSCO) entered a 10% correction and has taken the whole of April to make up for the lost ground. The stock was at $45.3 on Friday at market close, up by 6.8% since Morgan Stanley’s Michael Wilson announced it was on the Fresh Money Buy List. Also on March 23, Goldman Sachs Group Inc (NYSE:GS) added Cisco Systems, Inc. (NASDAQ:CSCO) to its Conviction Buy list, claiming it was still undervalued despite the 30% rise in value during the previous 12 months.
In its note to investors, Morgan Stanley painted a pretty picture of Microsoft Corporation (NASDAQ:MSFT). Analysts were very optimistic about the prospect of the tech giant, expecting significant improvement in the company’s revenue growth, improving margins, and capital returns during the next three years. They also believed Microsoft would emerge as a “public cloud winner” due to the popularity of its Azure cloud service. Morgan Stanley analysts eyed a 16% rally with a price target of $110.
Although Microsoft Corporation (NASDAQ:MSFT)’s 2017 rally extended into the first month of 2018, it lost steam after the February selloff. The stock quickly regained its balance but failed to stage another rally and succumbed to the general uncertainty in the market. Still, Microsoft shares have moved into green territory and are currently up by 9.15% since the announcement of the Fresh Money Buy List. Microsoft Corporation (NASDAQ:MSFT) reported fiscal third quarter results on April 26, easily beating analysts’ estimates. The tech giant registered $0.95 in earnings per share and $26.82 billion in revenue, topping projections of $0.85 EPS on the back of $25.77 billion in revenue. Among the highlights of the report was a 93% revenue growth from the Azure cloud service, down from the 98% rise reported in the previous quarterly report. Investors reacted to this development by pushing the stock lower on the following trading day.
From the oil and gas industry, Morgan Stanley had selected Continental Resources, Inc. (NYSE:CLR) due to its “capital discipline in the exploration and production space” and had set a price target of $70 per share. One of the company’s main goals in 2017 was to increase production within cash flow. In a February note to investors, Morgan Stanley energy analyst Benny Wong wrote that Continental Resources was showing one of the “greatest rate of change towards higher sustainability.”
Morgan Stanley has pretty much nailed this bet, with Continental Resources, Inc. (NYSE:CLR) currently trading around the $65 level and up by more than 11.03% since March 23. For the 2018 first quarter, Continental Resources, Inc. (NYSE:CLR) posted results that exceeded expectations, driven mainly by rising oil prices and robust output growth from its North Dakota Bakken shale operations. The company posted adjusted earnings of $0.68 per share, topping analysts’ estimates of $0.64 per share, while revenue came in at $1.14 billion, also above expectations.
E*TRADE Financial Corp (NASDAQ:ETFC) also made its way into the Fresh Money Buy List, because it was trading at a discount to the market and its peers, offered “multiple paths to earnings upside” and “strategic optionality protection.” Morgan Stanley analysts explained the last term in the following way: “The board of ETFC has stated its intention to meet certain growth objectives or to seek strategic alternatives for the company, and we believe there could be value in the business for hypothetical acquirers, should that time come.” They estimated an upside potential of 12%, having placed a price target of $64 per share.
E*TRADE Financial Corp (NASDAQ:ETFC)’s performance in the first quarter was boosted by the increased volatility in the market, as it registered record daily average trading revenue. The company reported earnings of $0.88 per share and $708 million in net revenue, surpassing Wall Street’s expectations. Since Morgan Stanley issued its recommendation on E*TRADE Financial Corp (NASDAQ:ETFC), the stock has been inching upwards. It ended Friday’s session at $61.47 per share, up 15.8% since March 23.